Pachter believes publishers could face significant backlash for using their new power

With yesterday's announcement of the Xbox One's game licensing capabilities, we now know that Microsoft has given publishers the power to block second-hand sales of games if they chose. Despite the looming threat of this option, Wedbush Securities analyst Michael Pachter and Baird Research senior analyst Colin Sebastian both believe that publishers won't jump at the chance.

"In our view, it is still unlikely that publishers will block used games; however, they may try to extract a retail fee," said Sebastian in a note this morning.

"We expect the majority of the large publishers to enable used gaming, at least in the early years of the Xbox One launch. In our view, any publisher that disables used gaming risks a backlash or boycott of its titles by gamers, negatively impacting sales," said Pachter in his release.

Pachter explained that publishers who did block used games would be leaving themselves open to lose customers to competitors who allowed second-hand sales and trades. Instead, he expects that publishers will lock used game trades for a certain period of time near launch.

"We continue to believe that the currency generated from used game trade-ins is beneficial for the publishers, as it provides currency available for new game purchases. However, many believe that used games sold in proximity to a new game's release cannibalizes sales of the new title, so we think that some publishers may limit used game trade-ins for a specified period of time following the game's launch," he said. "We expect used gaming to continue to be widespread, to the benefit of GameStop."

The analysts believe the announcement was a mixed bag for GameStop. While a possible block on used games would affect the company, the revelation that all titles would be available for digital distribution on launch day could be a blow to the retail giant's new sales.

"Overall, the announcements were mixed for GameStop, alleviating some concerns over used game restrictions, but raising others around publisher discretion over game access," said Sebastian. "At first glance, we would not be surprised if publishers use the opportunity to ask for a revenue share, although we see it as unlikely that GameStop would agree to any meaningful fees given business model constraints and outsized market share."

"We note that the model of simultaneous availability of a game on a disc and digitally is not new and has been offered for many games in recent years. In fact, we expect full game downloads to represent potentially as much as 20 to 25 percent of new game software sales (up from less than 5 percent today) in the upcoming console cycle," said Sterne Agee analyst Arvind Bhatia.

"Games will be made available via digital distribution through Xbox Live on the day of release of the packaged product," said Pachter. "We believe that this disclosure has the greatest potential to negatively impact GameStop's business, as GameStop is unlikely to participate directly in these digital sales; however, we believe it is in the best interests of Microsoft and the publishers to integrate GameStop's PowerUp Rewards currency into digital transactions in some manner."

Pachter theorizes that Microsoft could either allow digital game sales from its DLC kiosks in-store, or integrate GameStop's PowerUp rewards with Xbox Live.

"In the first scenario, GameStop's DLC kiosks could be used by Microsoft and the publishers to garner significant interest in upcoming and already available titles, maximizing pre-orders and in-store sales. In the second scenario, the amount of currency available to make purchases on Xbox Live would increase dramatically, and all parties would benefit from increased online spending," he added.

Pachter believes GameStop stock will outperform and has forecasted a 12-month price target of $49 per share. Sebastian also gave GameStop an 'outperform' rating, but offered up a more conservative price target of $38. Bhatia attached a 'buy' rating to GameStop, with a price target of $46. The company's stock is $37.14 as of this writing.

"While the company's long-term position remains under scrutiny given the inevitable shift of media consumption online, we believe the company should benefit from a high-quality lineup of core game coinciding with the next-generation console cycle, and potential positive comp store sales in late 2013," Sebastian said.

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Pachter explained that publishers who did block used games would be leaving themselves open to lose customers to competitors who allowed second-hand sales and trades. Instead, he expects that publishers will lock used game trades for a certain period of time near launch.

And if said game is a rushed and buggy mess or otherwise not up to snuff to some standards and can't be traded back until that grace period is up or a patch is released... then what? Oh, this is going to be rich... but Pachter's comments always need to be taken with a grain... no, a box of salt anyway...

While a possible block on used games would affect the company, the revelation that all titles would be available for digital distribution on launch day could be a blow to the retail giant's new sales.

Unlikely. Every publisher and hardware company out there is pretty damn afraid of losing retail support, so expect the digital distro versions of titles to be more expensive than the retail discs. Which means Gamestop is still in-the-running.

In our view, any publisher that disables used gaming risks a backlash or boycott of its titles by gamers, negatively impacting sales," said Pachter in his release.

That assumes that the general gaming public care. You would think that all this adverse publicity for MS would negatively impact sales, but I don't think it really will. We all hope it will, because MS shouldn't be able to treat the consumer like this, but honestly? Nah.

Edited 1 times. Last edit by Morville O'Driscoll on 7th June 2013 7:12pm

I'm really interested to see how this all is going to play out. I would not be surprised if the draconic measures will actually accelerate the demise of dedicated home consoles.

And I believe that the amount publishers "lose" through second-hand sales is vastly exaggerated by number crushers that fear for their job and use it as a deflection point for real issues, such as catering only to a select audience that actually has more differentiated playing habits - while upsetting those that still like to play on consoles and PCs with brodude dumbing down of once great genres like RPGs. Dragon Age, anybody?

That assumes that the general gaming public care. You would think that all this adverse publicity for MS would negatively impact sales, but I don't think it really will. We all hope it will, because MS shouldn't be able to treat the consumer like this, but honestly? Nah.

I dunno... as people look into this and word spreads, the backlash here seems to be building and spreading since the first reveal (and more so I recall than when the PS3 was revealed to that "buying into potential" speech), so unless it's a showstopper of an E3 that zaps away the hate and fixes the PR up to the point people believe Microsoft and not the PRISM theorists that seem to be gaining traction, it'll be an interesting and weird launch for the console.

I popped into a local shop here and asked around for a bit and so far, there's indeed plenty of excitement about the Xbox One, but also some worry as to how some of the new business model will affect gamers who have tight budgets and simply want to move an account over and not buy into re-purchasing what they (think they) own.

I bitch a lot, but I actually don't want Microsoft to wash out at all. It just irks me that they're basically not paying mind to any money some users WANT to throw at them but can't. These people aren't the Sony/Nintendo fanboys/girls and forum hangers-on, mind you - they're longtime 360 owners who just happen to now be out of the loop through no fault of their own, but a mandated set of restrictions that are very inflexible to them.

There's a lot of frustration because the answers are slow to come and just get more convoluted despite the so called clarifications popping up (as a silent announcement, of all things) and refusal of execs to take more direct queries for the time being.

With a console that probably can't be sold off or traded once activated, games that now act like battery backed up NES carts (your family can play your games on their own saves! Whee!) and a company that seems determined to set a course not all are ready for and seems to be saying "the hell with you" if you're not ready... someone better keep a good eye on those (soon to be former) fans who don't buy in rather than all the ones who do.

As I've noted elsewhere, it'll sell like hotcakes, but I see a tough haul once the first issues roll in, as what's a console launch without problems major and minor?

Some console games appear to intent to carpet bomb their users with microtransactions, at which point going after used game profit margin might be a bit daft.

Some games have "makrotransactions", at least I have no better word for what Skylanders is and it is certainly not nickel and dimeing.

Some games, such as FiFa are in a position where the market position is strong enough to demand people to bend over and take it. EA made big announcements of having abandoned their online pass system. Whether that was due to being truly consumer friendliness, or the fact of MS offering it on a system level is of no consequence. EA is being put on the spot like no other company.

I personally don't think I could support a game that the publisher won't allow to be resold. Especially if this means my one-time use disc still cost me $60 up front. PC gamers may put up with that but I will NEVER pay $60 for a game/dvd/cd that I can only use on one system/account and can never resell.

Call me nuts, but since Microsoft is being a bit too coy, I have to think our loud in the form of WILD speculation until answers come in a few days. Warning: take this seriously at your peril ;^P

Imagine this: In order to buy an Xbox One, it's not going to be as simple as paying for then picking up a pre-order or waiting on a long line in the freezing cold in the middle of winter. We're in the digital age, right - so no more midnight console launches. Instead, new Xbox One and current Xbox Live users will be required to register and pay up front for a license that guarantees them a console (one license per console) that if desired, will be shipped to arrive either a day or two before the launch or on launch day.

This console can't be activated at all until the official launch - it's arriving early to be set up in the proper space and have its Kinect calibrated (and perhaps storing info) so the installation and account finalization is a faster process once the new Live service is turned on. As it won't play games at all, it's basically a "blank" box with a tutorial video and maybe that movie player working out of the box if someone wants to watch a film or two while they're waiting.

Microsoft clearly wants to own the living room, so it sort of makes crazy sense that instead of just selling the console to anyone who may turn around and resell it on eBay for a profit, they may want to (for the initial few weeks or so) control the supply stream so that they can say ALL of the consoles sold are online and working (which again, comes off as REALLY impressive in a future presentation). Sure many will complain because they "just want to try it out". But it seems their license plan is so set in stone that they solely want users who will follow EVERY term to the letter and have no problems with anything like BC or old XBLA purchases not playing on the console.

Like I said, CRAZY... but it'll definitely reveal just who the real core users of the console are...

It costs publishers say $10 to get a copy of a game printed, boxed and shipped to a retailer. Publishers then charge retailers around $25-$30 per unit (for a reasonable game). So, lets say the publisher makes around $15 per copy.

Publishers will approve second-hand sales... as long as they get paid the same $15 each time a copy is re-activated/sold. Then its no different from a normal sale.

But - the difference is Microsoft aren't getting *their* cut of $10. Because a new copy isn't actually getting produced (costs are lower), they might only care about say - $5 in licensing fees.

Lets say that retailers expect to make a similar cut for both new and used titles.
So - with this system, second-hand games will cost around $5 less than new titles.

...but wait! People are *selling* their used games to retailers, right? So for every $ that a retailer pays a consumer, they will want to recover the same money.

So in the end, consumers will end up getting just a few measly dollars for a second-hand game - otherwise the cost of a second hand game will be *higher* than a new title. Effectively destroying the second-hand market for games.

Assuming Sony stick with a rational model for the PS4, there is a going to be a HUGE price difference between a PS4 trade-in and a XBone trade-in. Not to mention a lot more second-hand games available.